(Bloomberg) -- Growing optimism that Israel could reach a cease-fire deal with Hamas is driving a rebound in the country’s markets.
The shekel has rallied about 3.6% in July, while Israeli stocks are outperforming the global benchmark for the first time since February. Local-currency bonds are vying with Colombia to hand investors the best returns in developing markets, alongside advances in Israel’s dollar-denominated debt.
Investors are paying new attention to Israeli assets, believing that Hamas and Israel are closer to accepting a US-backed cease-fire plan after almost 10 months of fighting. Lebanese militia Hezbollah — backed by Iran — has also pledged to stop attacking Israel if a pact materializes.
“The recent outperformance comes from the rising probability that some sort of cease-fire agreement can be reached,” said Brendan McKenna, an EM currency strategist at Wells Fargo & Co. in New York. “That is creating positive investor sentiment toward Israel, at least for the time being.”
The shekel’s advance is putting it within earshot of the strongest level since June 2023. Local bonds have returned around 5.4% this month, a turnaround from the 7.2% loss in the first half of the year when the risk of a widening war - drawing in Iran and the US — prompted investors to flee.
Similarly, Israel’s dollar-debt has clawed back around two-thirds of losses sustained in the year through June, when the country’s sovereign bonds were the developing world’s worst performers. Likewise, credit default swaps have cut the cost of hedging against default by the Israeli government in the next five years to the lowest since 2021.
“Positive cease-fire talks” are behind the performance, said Guillaume Tresca, a global EM strategist at Generali Asset Management in Paris. “The feedbacks are more positive than before, while the risk was for an escalation in the northern border with Lebanon. The risk is diminishing,” he said.
Israel declared war on Hamas, designated a terrorist organization by the US and European Union, on Oct. 7 when it was attacked by thousands of militants who killed 1,200 people and took some 250 hostages. The Hamas-run health ministry says that more than 38,000 people were killed in the ensuing conflict, although it doesn’t differentiate between civilian and militant casualties.
The two sides still have several sticking points to resolve for a deal, including questions over the release of hostages under any truce and under what conditions Israel — which has vowed to destroy the militant group —- could resume the war. The US said last week “there’s still miles to go” in the talks.
Prime Minister Benjamin Netanyahu is due to visit Washington next week to address members of Congress.
Israel is set to spend more on its military for years even if hostilities were to end soon, adding to a war bill of more than $22 billion in the first nine months of fighting alone.
These costs could lead to a spiraling debt burden, Bank of Israel Governor Amir Yaron has warned.
Markets want to see that “Israel isn’t losing grip,” Yaron said in a speech earlier this month. Fiscal policy is “the elephant in the room,” he said.
Still, a cease-fire would add sufficient momentum to the rally and offset any possible short-term profit-taking, said Joseph Wolf, chief executive officer at EFG Wealth Management in Tel Aviv.
“There’s usually what we call fresh powder - money on the sidelines almost all the time in Israel,” Wolf said. “It’s not surprising that you get these rallies when sentiment shifts, even if it’s just the short term.”
--With assistance from Selcuk Gokoluk.
(Updates with market changes, Netanyahu’s Washington visit)
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